Sunday, January 31, 2010

Class I Advanced Pricing

This blog focuses on the Federal Milk Orders that pay for protein. Approximately 6 million of the 9 million lactating cows in the U.S. are paid by the Class III component formulas. More than half of the cows not included in the Federal Milk Order prices are in California. Approximately 1 million are in the federal milk orders that pay on the advanced pricing model.

In this post, we'll examine the prices for the federal milk orders that pay on the advanced pricing model. Those milk orders are primarily in the Southeastern U.S., and are named "Application, Southeast, and Florida. The Arizona/Las Vegas Order is also paid on the advanced pricing model.

The formulas are clearly stated in the Price Formulas - 2010 posted on the USDA site. In these orders, producers are paid on pound of skim milk + butterfat.

Butterfat pricing is calculated exactly the same way as the butterfat pricing for the Federal Milk orders paying strictly on components. (Butterfat Price = (butter price - .1715)x 1.211)

The value of the skim milk is the greater of the class III skim pricing or the class IV skim pricing. In 2009, it was nearly 50/50. In eight of the months, the Class I skim price was based on the class III formula and in four of the months, it was based on the Class IV formulas. When the price is based on the Class IV formulas the difference is small, as shown below. The impact of the Class IV formulas is negligible.

The Class I model does not pay producers directly for protein because the payment is based on cwt of skim milk plus pounds of butterfat, however the skim price which makes up most of the check, is very dependent on the cheese prices. The most recent advanced pricing announcement was made a week ago.